MUTUAL FUND RATINGS

Mutual fund ratings are important for investors. They use ratings as a landmark when building investment portfolios. There is no trusted mutual fund ratings agency on Ukrainian market. The most well-known rating in the world is Morningstar’s «star rating». The article describes its main features. Morningstar’s rating takes into account risk-adjusted returns, fund’s load and tax opportunities. It breaks mutual funds into narrow categories and peer-groups.

Quantitative ratings use past data and cannot be reliable basis for forecasting future returns of a mutual fund. High rating cannot guarantee better performance of the fund in the future. The funds with higher ratings do not outperform funds with lower ratings constantly.

Index funds are undervalued by quantitative ratings. They get mediocre ratings because they closely follow chosen benchmark. At the same time index funds often show better performance in the long run because they have lower load. The size of a load is one of the most important indicators for investors. Generally lower load results in better performance of the mutual fund in the future.

It is important to include qualitative indicators during designation of a rating. For example, Morningstar score funds based on 5 aspects: the investment process, historical performance, fund manager, parent firm and current price. Including qualitative indicators can improve the reliability of a rating.